Synthetic Lending Rates Predict Subsequent Market Return

13 Pages Posted: 2 Feb 2022

See all articles by Matus Padysak

Matus Padysak

Comenius University - Faculty of Mathematics, Physics and Informatics

Date Written: December 2, 2021

Abstract

The paper studies the relationship between synthetic lending rates derived from the options market and subsequent market performance. The research examines Cboe Hanweck Borrow Intensity Indicators, defined as the risk-free rate minus the lending fee. According to the results, the rise (fall) in aggregate borrow intensity computed as the average borrow intensity for more than 4000 assets predicts positive (negative) next day's market return proxied by the SPY ETF. The effect is statistically and economically significant but is quickly reversed over the next two days. Additionally, the effect is much more substantial during crisis periods in the sample: the crash of December 2018 and the beginning of the coronavirus pandemic (February - April 2020). The two crises are the main reasons the market timing strategies outperform the SPY benchmark during the sample period. Overall, the results show crucial implications of changes in borrow intensities and lending fees during crises.

Keywords: lending rates, borrow intensity, shorting, shorting costs, SPY, crisis

Suggested Citation

Padyšák, Matúš, Synthetic Lending Rates Predict Subsequent Market Return (December 2, 2021). Available at SSRN: https://ssrn.com/abstract=3976307 or http://dx.doi.org/10.2139/ssrn.3976307

Matúš Padyšák (Contact Author)

Comenius University - Faculty of Mathematics, Physics and Informatics ( email )

Mlynská dolina
SK-842 48 Bratislava, Bratislava 842 48
Slovakia

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